A
s part of the Defense Department's Better Buying Power initiative, improving the
Pentagon's acumen with regard to service contracting has been on the to-do list
since the first version of BBP was unveiled in 2010. But DoD and military service
officials are giving strong indications that they plan to devote serious effort to
the subject over the next year.

In the immediate aftermath of the Navy's ship husbandry scandal, Secretary
Ray Mabus promised "radical" changes in Navy service contracting. In its 2015
budget, the Navy pledged to reduce its service contract spending by $2.5 billion.

In separate interviews, top Army and Air Force acquisition officials told me
they're planning a major focus this year on getting more efficient with services,
both through more use of strategic sourcing and by gaining more insight into what
services their departments are actually buying. Probably not a bad idea, because
the military actually spends more money on services than it does on products.

"I think two years from now, you're going to see much more attention to our
services, much more knowledge of our services and much more experimentation on how
we buy our services," Dr. William LaPlante, the assistant secretary of the Air
Force for acquisition, told me in an interview (tune in June 4, at 3 p.m. ET, to
hear the full hour). "I think it's been wisely recognized as an area that needs
attention."

LaPlante says the Air Force is in particular need of better data on its spending
for knowledge-based services.

"I jokingly say knowledge-based services should just be called 'stuff,'" he said.
"Because the way we categorize it, it can contain everything from a plasma
physicist helping on the re-entry of a Minuteman missile, to designing a building,
to helping with a view graph presentation. It's all real work, but we've got to
get more precise on how we classify these things."

More broadly, LaPlante said he's planning a period of experimentation around
service contracting. The biggest such experiment involves the Air Force's
commitment to use GSA's OASIS contract for the preponderance of its purchases of
professional services.

LaPlante believes the majority of the cost savings the Air Force will find won't
come from buying fewer services, but by eliminating regional and command-level
disparities in the rates the Air Force is currently paying.

"What are we paying for IT services at bases in different parts of the world? It
really comes down to market research. What is reasonable and achievable? We are
going to find instances where we just shouldn't be buying things, but I think much
more we're going to find places where we're just paying way too much, not out of
any malice, but just out of not having the knowledge of what's achievable."

The Air Force was the first military department to create single manager for all
service contracting, and the Army has since followed its lead, said Harry Hallock,
the deputy assistant secretary of the Army for procurement. In addition, the Army
has hired portfolio managers to oversee given categories of service contracting
across the entire Army.

"I really think this is going to be a good year for services," he said. "We've got
to save money, and this is a place that's ripe for it. I think the way to get at
services better is to look at it from a strategic sourcing point of view. We all
buy certain types of services, and we all buy them differently. Why are we doing
that?"

Hallock said his service contracting experts have begun traveling to local
commands to help them understand how to better define their requirements. A
majority of service contracting is executed not at the Pentagon, but by commanders
with local needs who are not acquisition experts.

Like the Air Force, Hallock says the Army thinks it will save money by eliminating
duplication and inefficiency in its contracting methods. But unlike the Air Force,
he thinks a majority of the savings will come from culling out unnecessary
purchases.

"This whole thing starts with what services do we need. I think that's where we're
going to save the bucks," he said. "An example I use is those folks out there who
don't think they're part of the acquisition process who are saying, 'I have 20
employees and I need them all to have BlackBerrys.' OK, why? What do those folks
do that requires them to be tethered to the office 24/7? When you start asking
those questions, you start getting answers that get you to the real requirements.
That's where I think we're really going to get bang for the buck."

Meanwhile, the Office of the Secretary of Defense has launched its own new push to
get the Pentagon's arms around service contracting from a DoD-wide perspective.

Alan Estevez, the principal deputy undersecretary for acquisition, logistics and
technology, is leading a project that will create "domain experts" for 15 separate
areas of services. Their task will be to work with the military services to
identify areas of service contracting where the lion's share of money is being
spent, and hopefully find the best practices for buying different types of
services.

If Pentagon officials don't figure out how to reduce their service contracting
bill, there's a chance Congress will do it for them. The House version of next
year's Defense authorization bill pays to retain weapons systems DoD wants to cut,
in part, by slashing service contract spending by $818 million.

FAR Council imposes retroactive pay caps on contractors

T
he government's Federal Acquisition Regulation Council has just published a final rule to significantly broaden the pay
caps that apply to vendors who work on DoD, Coast Guard and NASA contracts.

The current amount contractors can charge back to the government for their
employees' salaries is $487,000, a figure set by last year's Ryan-
Murray budget agreement.

Previously, the ceiling applied only to a company's five highest paid executives.
The FAR change extends the caps to all employees, including scientists, engineers
and other workers who can be pricey to hire.
The decision finalizes an interim rule the FAR Council first published in June of
last year.

Needless to say, contractors have never much liked the idea of broadening the pool
of covered employees, nor the idea of caps in general for that matter. But they're
particularly upset about the new rule, because it applies retroactively to all of
the compensation costs they've incurred on government contracts that were signed
anytime after Dec. 31, 2011.

"We are dismayed that they did not rectify the improper retroactive application
between the December 2011 law change and the issuance of an interim rule in June
2013," said Alan Chvotkin, vice president and counsel for the Professional
Services Council, an industry group. "That 18-month interval of inaction was
unnecessary and, more importantly, unmistakably imposes a retroactive reduction in
costs in violation of the government's own acquisition regulation and a long line
of court decisions. As a result, covered contractors will have to unscramble their
accounting to make this change in allowable compensation rates that were validly
incurred during the 18 months it took the FAR Council to act. That is simply
unacceptable."

Vendors argue the decision is guaranteed to harm their cash flow and is likely to
discourage companies from pursuing government business. But the government argues
its hands were tied, since Congress mandated the effective dates for the new caps
in the 2012 version of the Defense authorization bill.

In comments to the interim rule — comments that obviously proved to be
unpersuasive — companies pointed to several reasons that's not true.
Applying the change retroactively amounts to a breach in contract, and federal
courts, they say, have held that contracts should be honored even if they conflict
with federal law. They also argue another section of the FAR itself explicitly
forbids new rules from being applied retroactively.

Obama pledges IT fixes at VA. What does that mean for
VistA?

Given that information technology issues in the Department of Veterans Affairs
now have the attention of the President of the United States, the ongoing
modernization of VA's VistA health record system bears watching over the next few
months. Will the patient scheduling scandal in Phoenix and elsewhere provide a
boost for the upgrades VA's already working on, force the project to reboot or
maybe something in between?

During the brief press conference Friday in which he announced Eric Shinkseki's
resignation, the President lamented that patient schedulers in Phoenix had to use
four different computer screens running antiquated software and made clear he
wants at least the scheduling portion of VistA fixed immediately.

"You have, in many cases, old systems, broken down systems. This is stuff that is
imminently fixable, but we've got to know about it," he said.

VA, which helped pioneer the field of health IT, recognized several years ago that
the entire suite of applications and infrastructure that make up VistA has gotten
long in the tooth, so it has spent the last three years making incremental
upgrades to the system with help from the open source community.

VA appeared to have settled on the path it wants to take for the outpatient
appointments module after a challenge competition that culminated last October with a $1.8
million prize to a D.C. firm called Medred, which engineered an open source
scheduling application that plugged into VistA and also met modern federal health
IT standards.

VA hasn't publicized its schedule for deploying a new patient appointments
application to medical facilities, but last week's interim IG report made clear that VA is a long way from where it needs to
be, both from a technology and business process standpoint.

Per the IG, getting a patient on the electronic waiting list in the Phoenix system
involved taking a screenshot from one computer, printing it out on paper, and then
sneaker-netting the same data down the hall to another division in a process that
could take one to two months.

That sort of thing is clearly indefensible, and we don't quite know yet whether
that particular subcomponent of the Phoenix problem is the product of an
intentional effort by local officials to create a Rube-Goldberg scheme in order to
obfuscate wait times or more the fault of the underlying technology.

In any case, the community of folks who have been excited about or have an
interest in VA's decision to try a new approach to modernizing complex federal IT
systems have an interesting few months ahead.